ECB Crisis Management Is Half-Hearted

By Geoffrey T. Smith

The ECB is back in crisis mode, but it may not have done enough at Thursday’s governing council meeting to stop the debt crisis spreading further still.

Traders confirmed that the ECB bought government bonds in the open market for the first time since March as President Jean-Claude Trichet held his monthly press conference. But the ECB appears to have undermined its own actions by being too half-hearted. Instead of buying Spanish and Italian bonds, those which are now at the focus of the crisis, it only bought Portuguese and Irish ones.

As such, it gave the impression that it is still not prepared to risk trying to support the huge debt markets of southern Europe’s two largest economies, for fear of finding out how many people want to sell. The task of supporting Italy and Spain, it would seem, is one for other euro-zone governments—when they get back from vacation.

The reaction has been swift: Italian 10-year bond yields have risen back to 6.18%, close to their highest since the introduction of the euro 12 years ago, while Spanish 10-year yields rose to 6.31%. Italian bank stocks have also fallen sharply, reflecting the market’s concern about their massive exposure to their sovereign. The stocks of both Unicredit SpA and Intesa SanPaolo have both been suspended, limit down, on the Milan bourse. By contrast, the German Bund future, the euro zone’s safest haven, hit a contract high of 122.97.

“The ECB may have missed an opportunity to act more convincingly,” says Berenberg Bank chief economist Holger Schmieding, arguing that only it can act swiftly enough, and in enough scale, to stop a speculative attack against the two threatened countries.

The market’s disappointment with the apparent half-heartedness of the bond-buying overshadowed the ECB’s other measure, namely the reintroduction of an unlimited offering of six-month money. This tool was used through 2009 to ensure that banks kept access to liquidity even if they were shut out of wholesale funding markets.

The only trouble with it was that it encouraged banks to rely too much on the ECB, encouraging an addiction that it is now finding impossible to break—lending to banks in Greece, Ireland, Portugal and Spain accounted for two-thirds of its total credit in June.

The ECB should never have bought bonds in the 1st place. Let alone spanish and italian ones. Because not even the German taxpayers pockets, who are already on the hook for ~700+ billion Euro (of which some dozen billion via the ECB) in transfers and guarantees for PIIGS are deep enough to bail out also Italy and Spain.

12:49 am August 5, 2011

DarkStar wrote:

Good article. Europe acts as if the problems of Spain, Italy, Greece, Portugal, Ireland etc aren't the problems of Europe as a whole. Like the United States during it's Articles of Confederation period.....the individual states see themselves as German, French first and European second. The process we're going through now is the gradual, but inevitable realization by Europeans that they gave up their national sovereignty when they created the Euro-zone. The market sees this, and treats Europe as Europe; it wants fiscal union and national identity minimized. Member European states still don't quite get this. Race to the end....what are the options? Break it up ( in whatever form that takes ), complete unification, or war. Given Europe's poor history of resolving crises in preceding centuries....the last option can't be ruled out. A fact the U.S. and Russia keep keenly in their collective memories.

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